Angel Syndicate

What is an angel syndicate?

Angel syndicate refers to an association of several business angels who jointly invest in a company under the lead of an experienced investor, the syndicate lead (lead angel). The contributions are usually pooled through a purpose-founded investment company, a special purpose vehicle (SPV). It appears as a single shareholder in the list of shareholders, the list of all shareholders filed with the commercial register. The principle resembles a buying group: many small amounts are put together, one person negotiates for all, and only one partner deals with the company.

Syndicates appear mainly in early rounds but also take part in later rounds alongside funds, then in the role of a co-investor. The parties involved are the syndicate lead, the co-investors, the investment company and, where applicable, a platform that handles formation, administration and payment processing. The relationship of the co-investors to one another is governed by the articles of association of the investment company. Towards the company, the investment agreement and the shareholders' agreement apply as for any other investor.

Network, syndicate and investment company

The term is used in differing breadth. Three forms can be distinguished:

• Business angel network: an association or a platform brings angels and companies together, for example through pitch events. Each angel investor decides and invests individually and becomes a shareholder in their own right.
• Syndicate without a joint vehicle: several angels negotiate together but each invests directly. The number of shareholders rises accordingly.
• Syndicate with an investment company: the angels invest in a company that in turn takes over the shares in the target company. For the company, this is the usual form and the easiest to administer.

In Germany, the investment company is often a GmbH & Co. KG (a limited partnership with a GmbH as general partner) or a GmbH, less often a German civil-law partnership (Gesellschaft bürgerlichen Rechts, GbR). Since 2024, a GbR can be entered in the list of shareholders of a GmbH only if it is registered in the partnership register (Gesellschaftsregister). There are also trust models in which a trustee holds the shares in its own name for the co-investors. Trust arrangements over GmbH shares can be subject to notarial form and must therefore be drafted carefully.

Pooling of investments and of votes

The pooling works on two levels. Economically, it combines many small contributions into an amount that matters for a round. Legally, only one shareholder appears towards the company: the investment company exercises the voting rights uniformly, signs resolutions and agreements and appears in the list of shareholders. The co-investors are invested in the company only indirectly.

How the investment company votes is determined by its articles of association. It is usual for the syndicate lead, or a management led by the syndicate lead, to exercise the voting rights and to seek the consent of the co-investors only for fundamental decisions, such as the sale of the investment. Without a joint vehicle, a similar effect can be achieved through a pooling agreement or a voting agreement (voting agreement). The angels then remain direct shareholders but undertake to vote uniformly.

Role and remuneration of the syndicate lead

The syndicate lead selects the investment, examines the company, negotiates the terms and represents the syndicate towards the company. The syndicate lead usually invests a notable amount of their own. The co-investors rely largely on the lead's due diligence, that is, the review of business model, figures and contracts, and on the lead's assessment. Whether they join in a particular investment, they nevertheless usually decide themselves.

The lead is generally remunerated through a profit share (carried interest): the lead receives a share of the co-investors' proceeds to the extent that these exceed their capital invested. Commonly, 10 to 20% of this profit is agreed. In addition there are costs for the formation, administration and winding up of the investment company, which the co-investors usually bear. The company generally pays the syndicate no remuneration.

Legal framework for angel syndicates

Whether an investment company that pools the capital of several investors counts as an investment fund within the meaning of the German Investment Code (Kapitalanlagegesetzbuch, KAGB), that is, as a fund for supervisory purposes, depends on how it is structured. A vehicle for a single investment selected by the participants themselves is assessed differently from a company that invests in several companies under a defined investment strategy. If shares in the investment company are offered to the public, prospectus and information requirements can apply.

For the company, who stands behind the vehicle also matters. In the due diligence of a later round at the latest, investors ask about the beneficial owners and the origin of the funds. The beneficial owners are the natural persons who own or control the vehicle. As a company, the vehicle must notify its beneficial owners to the transparency register. It must therefore be clarified whether the co-investors have been identified and checked and who keeps these documents.

Worked example: proceeds and profit share in an angel syndicate

Formula: syndicate lead's profit share = agreed rate × (proceeds - capital invested)

30 angels invest EUR 25,000 each in a Series A through a GmbH & Co. KG. The syndicate lead receives 15% of the co-investors' profit. Seven years later the company is sold, and proceeds of EUR 3 million are attributable to the investment company. The company's costs and taxes are disregarded, and for simplicity the syndicate lead is not invested personally.

• Capital invested: 30 × EUR 25,000 = EUR 750,000
• Profit: EUR 3,000,000 minus EUR 750,000 = EUR 2,250,000
• Syndicate lead's profit share: 15% of EUR 2,250,000 = EUR 337,500
• Remaining proceeds of the co-investors: EUR 3,000,000 minus EUR 337,500 = EUR 2,662,500
• Per co-investor: EUR 2,662,500 divided by 30 = EUR 88,750, 3.55 times the amount invested
• Without a profit share: EUR 3,000,000 divided by 30 = EUR 100,000, four times the amount invested

For the company, the pooling means that the list of shareholders shows one shareholder instead of 30. For a capital increase, an amendment of the articles of association or a company sale, one declaration by the investment company is enough instead of 30 individual declarations, powers of attorney and proofs of identity for the notary.

Distinction: angel syndicate, business angel, fund and crowdfunding

• Angel investor: invests individually and directly. In a syndicate, the angel becomes an indirect shareholder and leaves review and negotiation to the syndicate lead.
• Venture capital: a fund raises capital for many future investments and decides itself on their selection. In a syndicate, each co-investor usually decides for each investment whether to take part.
• Pooling agreement: pools the voting rights of directly invested shareholders without a new company holding the shares.
• Crowdfunding: investment by many small investors through a platform, often in the form of subordinated loans instead of shares and without a leading investor who negotiates.

Common mistakes

• Voting rights not pooled. If the vehicle's articles of association require the consent of all co-investors for every vote, the advantage of pooling is lost.
• Unclear representation. If it is not regulated who represents the investment company and how quickly it can pass resolutions, this delays the notary appointments of later rounds.
• Unknown co-investors. Where information on the beneficial owners is missing, queries arise in due diligence that can delay a later round or a sale.
• Dependence on the syndicate lead. If the lead leaves or loses interest, there is no point of contact. The articles of association should provide for a successor.
• No planning for follow-on rounds. Syndicates are often formed for a single investment. Whether and how they take part in later rounds should be clarified in advance.
• Regulatory classification not checked. If a vehicle is operated like a fund, obligations under the KAGB can arise, up to registration or authorisation.

Frequently asked questions

How does a business angel invest through a syndicate?

Through a contribution to the investment company. The syndicate lead or a platform presents the investment with the most important documents. Each angel decides whether to join and with what amount, and joins the company. Platforms usually require a minimum amount and handle subscription, payment and the later reports; the angel does not appear in the company's list of shareholders.

Can the co-investors vote themselves in the shareholders' meeting?

No. The voting rights are exercised by the investment company. What say the co-investors have within the company is governed by its articles of association.

Do syndicates take part in follow-on rounds?

In part. Some syndicates form a new vehicle for a follow-on round, while others let the existing co-investors subscribe further. A contractual right to a follow-on investment is of use only if the syndicate raises the funds for it.

Can a syndicate lead a financing round?

In early rounds yes, if the syndicate lead negotiates the price and terms. In institutional rounds from the Series A onwards, funds usually take on this role, and syndicates take part there as co-investors.

Who bears the costs of the investment company?

As a rule the co-investors, through their contributions or through deductions from the proceeds. If the company bears costs, this should be expressly regulated in the investment agreement and capped in amount.

The Roemer Capital view

In rounds from EUR 1 million, Roemer Capital meets syndicates mainly as shareholders from earlier rounds or as co-investors alongside institutional investors. Roemer Capital clarifies early who represents the investment company, how it casts its votes and whether it can pass resolutions within the round's timetable.

If a syndicate is to take a part of the new round, Roemer Capital agrees with the lead investor whether the amount, the timing of payment and the information on the co-investors fit the planned closing. The vehicle's articles of association are drawn up by its initiators with their own legal advice; Roemer Capital negotiates on the company's side.